Could California Crumble?

As I scan the latest images online chronicling the aftermath of Japan's mammoth earthquake and ensuing tsunami, my brain barely registers the surreal post-apocalyptic scape, replete with severed foundations and automobiles entombed in mud, limbs protruding from rubble, and cargo containers strewn about like Matchbox cars.

In the affected prefectures, there is simply not enough food and water for the country's stunned refugees, as nearly half a million inhabit makeshift shelters. When the smoldering flames dissipated, an estimated 18,400 people had perished as a result of the disasters. That number is markedly rising as government authorities continue to sift through the debris amid ongoing measures to not only deliver aid but also contain and assess the nuclear emergency unfolding before them.

The 9.0-magnitude earthquake on March 11 was the third in a series of three catastrophic quakes at three corners of the Pacific plate: Japan, New Zealand and Chile, all of which have placed extraordinary demands on the insurance industry.

In fact, some are already dubbing this the worst (and potentially most expensive) calamity the world has ever known. The World Bank recently projected that Japan may need at least five years to rebuild, but no one is yet certain about the full impact on the nation's already fragile economy.

As the world watches footage of distraught survivors and rescue personnel, one can only imagine their silent soliloquies as they delicately rummage through vestiges of their former reality. What we can we possibly learn from such a tragedy? Is the U.S. vulnerable to disasters that could ostensibly be as deadly and unrelenting?

Japan's March 11 earthquake and ensuing tsunami—along with the havoc Hurricane Katrina wreaked on the U.S. Gulf of Mexico coastline in 2005—provide a grim reminder that Calif., with faults snaking through its southern region and off the coast, is very vulnerable. These event also provide a glimpse of both the enormity of the recovery efforts and the residual environmental hazards.

Since 1900, earthquakes have occurred in 39 states, causing damages in all 50. But today the stakes are even greater. That's because the potential cost of U.S. earthquakes is rising due to urban development in seismically active areas and older buildings, which may not be up to snuff with current building codes.

Yet, despite the state's high exposure to seismic risk, a relatively miniscule portion of Californians carry earthquake insurance. Only about 12 percent of homes with a homeowners' policy in Calif. also have earthquake insurance. That represents a noticeable dip from the more than 33 percent carrying the supplementary insurance in 1996, according to I.I.I. data.

This seeming reluctance to obtain earthquake insurance defies logic. So why aren't more people clamoring for coverage? The answer, as it often does, deals with money.

Earthquakes are not a covered peril under standard homeowners' policy. Calif. homeowners can also secure coverage from the California Earthquake Authority (CEA), a privately funded, publicly managed organization. However, flood damage stemming from a tsunami would typically be covered under a separate flood insurance policy, which would be available from the NFIP and some private insurers.

In a push to make earthquake coverage more affordable, U.S. Senators Barbara Boxer and Dianne Feinstein introduced a bill (S 637) on March 17 to make $5 billion in bonds available to certified public entities like the CEA following a huge catastrophic event.

Glenn Pomeroy, chief executive of the CEA, commented that the federal measure would allow the CEA to reduce rates—possibly by as much as one third—because it would decrease the association's reliance on reinsurance.

It remains to be seen if the disruption in Japan's livelihood and infrastructure will be a much-needed wake-up call to U.S. legislators and residents. The devastation has prompted a flutter of hypotheticals and worst-case scenarios, along with the realization that the calamities that befell Japan could easily happen here.